Wednesday, November 28, 2012

Value Creation & Cost Minimization Are Not Mutually Exclusive: Beware of Treating Them As If They Are!

It has been decades since top-notch procurement has been recognized as a means of ensuring an uninterrupted supply of high quality goods and services, from responsive and responsible suppliers, at the minimum total cost of ownership.  Cost minimization, if you will.

As procurement departments approached excellence in their cost minimization activities, the procurement function itself expanded to encompass more things:  collaborating with suppliers on joint process and product improvements, soliciting and implementing innovative ideas from the supply base, establishing the inbound supply chain as a source of competitive advantage and growth of market share, etc.  Value creation, if you will.

In many evolutions - music, fashion, romantic relationships, business, and more - people embrace "the new" and sneer at "the old."  Perhaps it is an innate human tendency.

But I'm telling you right here, right now:  beware of allowing that tendency to force you to treat value creation and cost minimization as mutually exclusive, because they are not.  It has concerned me that I have heard some sketchy procurement consultants and wet-behind-the-ears procurement leaders say the equivalent of "We're focused strictly on value creation...cost minimization is old school!"

I've heard similar statements often enough lately to consider it a trend.  A disturbing one.

Now, don't get me wrong, value creation is definitely something that needs to be among today's chief procurement officers' top priorities.  But cost minimization needs to be up there as well.

Incurring the minimum total cost of ownership for products and services from an optimized supply base that meets quality, delivery, support, and social responsibility standards is a timeless procurement goal.  It's just good, basic business.  To maximize profit improvements, revenue must increase and cost must decrease.  It's an accounting fact and it isn't going to go away.  Any good CEO will demand that costs be kept under control.

So do both:  create value and minimize cost.

I may pat you on the back if you tell me you've long ago donated your leisure suits and haven't used the phrase "gag me with a spoon" since the '80's.  But if you tell me that you are no longer are concerned with cost minimization only value creation, I may have to hand you a copy of my book, The Procurement Game Plan.  And by "hand you a copy," I mean "smack you in the head with it."


To Your Career,
Charles Dominick, SPSM, SPSM2
President & Chief Procurement Officer - Next Level Purchasing Association
Author - The Procurement Game Plan
Struggling To Have A Rewarding Purchasing Career?
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